O'Charley's to Join Fidelity

O’Charley’s Inc. () recently inked a definitive agreement with Fidelity National Financial Inc. (FNF - Snapshot Report). Under the agreement, Fidelity will acquire all the outstanding shares of O’Charley’s for a total equity value of approximately $221 million on a fully diluted basis.

The purchase price is at a 42% premium to O’Charley’s closing stock price of $6.92 on February 3, 2012 and at a 57% premium over the closing 20-day average trading price of $6.27. The transaction is expected to close in the second quarter of 2012.

O'Charley's operates more than 340 full-service restaurants under the O'Charley's, Ninety Nine and Stoney River concepts. However, in fourth-quarter 2011, O’Charley’s loss per share was 37 cents compared with 97 cents in the year-ago quarter.

O’Charley’s performance has been dismal for quite sometime. After recording a profit in the first quarter of 2011, the Nashville-based company incurred losses in three quarters in a row. Prior to first quarter 2011, the company delivered losses for six consecutive quarters.

At the end of fiscal 2011, the cash balance of O'Charley's accounted for 5% of total assets while other current assets comprised 10.6%. The company‘s total debt obligation accounted for 46.2% of total liabilities and shareholders' equity.

We view the deal as strategically positive for both companies as O’Charley’s and American Blue Ribbons Holdings, a restaurant company owned by Fidelity, operate under the same vertical. With this acquisition, Fidelity, which is in mainly into title insurance, mortgage services, specialty insurance and information services, will broaden its operational base in the restaurant industry and solidify its market position. O’Charley’s, in turn, also will receive a significant and immediate cash value for its shares which will provide an impetus to turnaround the chain.

As a point of reference, in mid October 2011, O’Charley’s sold its 50 restaurants to Scottsdale, Arizona-based Store Capital, a new-generation REIT formed to invest in single-tenant real estate. Per the deal, Store Capital purchased the said units and leased the assets back to O’Charley’s. The company commented that it would use the net proceeds to retire almost all its long-term debt.

O’Charley’s, which competes with the likes of BJ's Restaurants Inc. (BJRI - Analyst Report) and Krispy Kreme Doughnuts Inc. (KKD - Snapshot Report), currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We also maintain our long-term Neutral recommendation on the stock.